The market continued its erratic movement during the course of the
week. Though the market only lost another 8 points over the week, the market volatility
continued at a large scale showing a movement of 40 points in both direction. The KSE 100
closed at 1044.04 points as compared to 1052.19 recorded last week, translating into a
loss of 0.77%. Near term direction of the market is still being dictated by the situation
at the Line of Control. The KSE 100 during the week did recover partially on the news of
the arrival of the US Commander in Chief Central Command, but due to the lack of any
positive development during the talks was unable to sustain the rally and slumped the
following day. Any solution to the border dispute could provide a major surge in the KSE
100 index. On the flip side even the absence of any news is likely to keep the market
floundering at low levels. This weak sentiment is going to continue for the coming week
causing the market to hover around the 1000 levels. With dwindling volumes, it has become
apparent that the average investor in addition to the institutional investor is waiting in
the sideline for any direction. For the coming week we see initial resistance for the
Index at 1090 while major resistance is likely to be felt at the 1140 levels. Initial
support is likely to appear around the 1025 levels while major support will be felt at 980
levels.

Nishat Mills is a composite unit that earns over US$100 mn in export
sales every year. With such a large export sales bill, the company has always been the
savior of any government actions, which are largely aimed at favoring export promotion to
the hilt. However despite the aggressive stance by the government to extract as much
foreign exchange through exports, the ground realities have always failed the government,
thus causing the government to repeatedly fail in achieving its export targets or even get
a export earnings growth.

That is quite evident after looking at the results of HY 99 for Nishat
Mills. With export sales accounting for nearly 85% of total sales, it is no wonder that in
the face of a 13% drop in total Pakistani textile exports, Nishat has also felt the drop
in sales. This 9% drop is largely attributed to regional players especially in the Far
East region who are able to under cut the Pakistani producers due to their weak
currencies. However this drop in sales was followed by the lowering of the cost of Goods
Sold. With raw material and clothing and yarn used accounting for 72% of cost of goods
sold, the dismal cotton crop was liable to take its toll on the local textile
manufacturing concerns, Nishat being no exception

With a corresponding decrease in CGS, Nishat was only able to
fractionally feel the crunch in margins as the procurement of Cotton by Nishat is done in
advance. Thus they are able to avoid the procurement of raw materials at times of high
prices as is witnessed now, with Cotton touching 2800 Rs per maund. Operating expenses
have largely been curtailed as all major capital expenditure was taken up last year has
been implemented successfully. With OM hanging around the 14% mark, it is evident the
company has been able to avoid any forestalling in the transition period during the
capex.

Operating margins are going to show a significant increase due to the
abolition of octroi and other district taxes. With freight and distribution costs
accounting for nearly 66% of total operating expenses, with the abolition of these taxes,
the company will be able to distribute its products more efficiently locally as well as to
transfer the products to Karachi for exports.

Finally financial charges have also been largely in check. Though they
have fallen by 11%, the company is largely able to keep its financial charges in check as
last years financial charges were inflated due to a provision for diminution. Nishat's
financial charges are largely dictated by the cost of procuring raw materials. This is a
seasonal occurrence and is likely to remain stable between a certain range. A distinct
increase in long-term loans to finance the recent increase in installed capacity is likely
to add to the financial charges as well.

Coming down to profit after taxation we see an earnings contraction of
22%. However as this is a seasonal industry, Nishat is now likely to post handsome growth,
both in terms of sales as well as in earnings. One of the key determinants of future
earnings growth is going to be the weakening rupee. With a currency not able to hold its
ground any gradual erosion of value is going to translate into greater revenue for Nishat
Mills, with raw material cost being of no concern as it is largely procured locally. Thus
despite this seasonal contraction we remain buyers of Nishat Mills.

Refer to our Market Strategy of 5th June 1999, failure at the pivot
(1080) levels had extended the slump close to 1000 levels with a low of 1026.57 recorded
on 23rd June 1999. In the recent price movement pivot EF on the latest chart had
readjusted at 1090 levels which is now the initial resistance. The initial technological
support is also a psychological support at 1000 levels where price behavior has become
choppy and the consolidation continues. The index seems to be flattening, a obvious
indication of breakout in near term and sharp movement ahead.

The trend identifier line GH and the Base line AB are converging. If
the index breaks through initial support than a medium trend will emerge on price behavior
taking place in the convergence zone. In the event that the Base line or trend identifier
holds, which could provide very strong support, handsome returns can be expected over a
three to four months period of time.

We would prefer to exhaust our 35 percent cash around the 1000 levels,
invest an additional 35 percent when initial support breaks and the Base line is tested.
The remaining 30 percent would be retained till such time that

1 Positive trend is confirmed

2 Market collapses on news of further deterioration in the situation at
the border.